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I think Stocks and Shares ISAs are great ways to build long-term wealth. I’m using one to build a winning portfolio dominated by FTSE 100 and FTSE 250 shares.
Buying UK shares in one of these tax-efficient products could potentially provide me with an awesome passive income in retirement. Let me show you how.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Good, not great
I’m not going to say that cash accounts are useless financial instruments. I use an easy-access Cash ISA to store cash for a rainy day. These products are also a great way for me to manage risk — I know that any money I invest here will still be there 5, 10, 50 years from now.
The same can’t be said for investing in stocks, cryptocurrencies, commodities, or any other asset that’s subject to market forces.
However, this security comes at a price of much poorer returns, a problem that could have a significant impact on my retirement income.
Today, the best-paying, instant-access Cash ISA (from Harpenden Building Society) provides an annual interest rate of 5.01%. Here’s how my retirement pot would look after 30 years if I invested £20,000 in one of these today.
Better returns with FTSE 250 shares
That £89,622 I could make doesn’t look too bad at first glance. But, critically, it assumes the 5.01% rate will remain the same over the next three decades, which is a big assumption to make.
What’s more, the wealth I could have made with that Cash ISA pales in comparison with what I could have made by holding FTSE 250 shares in a Stocks and Shares ISA instead.
Since its inception in 1992, the FTSE 250 has delivered an average yearly return of 11%. This is what a £20k investment would turn into after 30 years if this long-term trend continues.
As one can see, that 11% return would make me almost six times as much cash after 30 years than that 5.01%.
And if I drew down 4% of this £534,162 a year, I could enjoy a healthy £21,366 passive income for around 30 years before my cash ran out.
An ISA investing strategy
Past performance is no guarantee of future returns. But building a diversified portfolio of FTSE 250 shares could give me a good chance of making a big second income when I retire.
One strategy I’m using is to buy well-established companies that can grow earnings ahead of the broader market. One such example is Britvic (LSE:BVIC), the drinks manufacturer that sells iconic brands such as Robinsons, Pepsi Max and Lipton in several markets including the UK, Brazil and France.
Stable demand for these drinks gives the company excellent earnings visibility over the long term. Meanwhile, its broad geographic footprint and position in multiple categories (including soft drinks, water and energy drinks) gives it extra stability.
Supplementing shares like this with high-dividend, high-growth companies adds risk. But this would also enable me to potentially make greater returns over the long term. And by buying a selection of different companies (say five to 10) I can greatly reduce this risk.